Userid: CPM Schema: tipx Leadpct: 100% Pt. size: 10 Draft Ok to Print AH XSL/XML Fileid: Publications/P334/2012/C/XML/Cycle06/source (Init. & Date) _______ Page 1 of 53 11:47 - 3-Dec-2012 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing. Department of the Treasury Internal Revenue Service Get forms and other information faster and easier by: Internet IRS.gov Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ) Publication 334 Catalog Number 11063P For use in preparing 2012 Returns Dec 03, 2012 Page 2 of 53 Fileid: Publications/P334/2012/C/XML/Cycle06/source 11:47 - 3-Dec-2012 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing. Contents Introduction 2 Future Developments 4 What's New for 2012 4 What's New for 2013 4 Reminders 4 Photographs of Missing Children 4 Chapter 1. Filing and Paying Business Taxes 5 Identification Numbers 5 Income Tax 6 Self-Employment (SE) Tax 8 Employment Taxes 9 Excise Taxes 10 Information Returns 10 Chapter 2. Accounting Periods and Methods 11 Accounting Periods 11 Accounting Methods 12 Chapter 3. Dispositions of Business Property 16 What Is a Disposition of Property? 16 How Do I Figure a Gain or Loss? 17 Where Do I Report Gains and Losses? 17 Chapter 4. General Business Credits 18 Business Credits 18 How To Claim the Credit 19 Chapter 5. Business Income 19 Kinds of Income 19 Items That Are Not Income 23 Guidelines for Selected Occupations 24 Accounting for Your Income 26 Chapter 6. How To Figure Cost of Goods Sold 26 Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42 27 Chapter 7. Figuring Gross Profit 28 Items To Check 29 Testing Gross Profit Accuracy 29 Additions to Gross Profit 30 Chapter 8. Business Expenses 30 Bad Debts 30 Car and Truck Expenses 30 Depreciation 32 Employees' Pay 33 Insurance 33 Interest 34 Legal and Professional Fees 35 Pension Plans 35 Rent Expense 35 Taxes 36 Travel, Meals, and Entertainment 36 Business Use of Your Home 37 Other Expenses You Can Deduct 38 Expenses You Cannot Deduct 39 Chapter 9. Figuring Net Profit or Loss 39 Net Operating Losses (NOLs) 39 Not-for-Profit Activities 39 Chapter 10. Self-Employment (SE) Tax 40 Who Must Pay SE Tax? 40 Reporting Self-Employment Tax 44 Chapter 11. Your Rights as a Taxpayer 44 Declaration of Taxpayer Rights 44 Examinations, Appeals, Collections, and Refunds 45 Chapter 12. How To Get More Information 46 Internal Revenue Service 46 Small Business Administration 48 Other Federal Agencies 48 Index 50 Introduction The purpose of this publication is to provide general infor- mation about the federal tax laws that apply to small busi- ness owners who are sole proprietors and to statutory em- ployees. This publication has information on business income, expenses, and tax credits that may help you file your income tax return. Are you self-employed? You are self-employed if you carry on a trade or business as a sole proprietor or an in- dependent contractor. Sole proprietor. A sole proprietor is someone who owns an unincorporated business by himself or herself. How- ever, if you are the sole member of a domestic limited lia- bility company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation. Trade or business. A trade or business is generally an activity carried on to make a profit. The facts and circum- stances of each case determine whether or not an activity is a trade or business. You do not need to actually make a profit to be in a trade or business as long as you have a profit motive. You do need to make ongoing efforts to fur- ther the interests of your business. You do not have to carry on regular full-time business activities to be self-employed. Having a part-time busi- ness in addition to your regular job or business may be self-employment. Independent contractor. People such as doctors, den- tists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether they are independent contractors or employees depends on the facts in each case. The general rule is that an indi- vidual is an independent contractor if the payer has the right to control or to direct only the result of the work and Page 2 Publication 334 (2012) Page 3 of 53 Fileid: Publications/P334/2012/C/XML/Cycle06/source 11:47 - 3-Dec-2012 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing. not how it will be done. The earnings of a person who is working as an independent contractor are subject to self-employment tax. For more information on determining whether you are an employee or independent contractor, see Publication 15-A, Employer's Supplemental Tax Guide. Statutory employee. A statutory employee has a check- mark in box 13 of his or her Form W-2, Wage and Tax Statement. Statutory employees use Schedule C or C-EZ to report their wages and expenses. Limited liability company (LLC). A limited liability com- pany (LLC) is an entity formed under state law by filing ar- ticles of organization. Generally, a single-member LLC is disregarded as an entity separate from its owner and re- ports its income and deductions on its owner's federal in- come tax return. An owner who is an individual may use Schedule C or C-EZ. Husband and wife business. If you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a part- nership, whether or not you have a formal partnership agreement. Do not use Schedule C or C-EZ. Instead, file Form 1065, U.S. Return of Partnership Income. For more information, see Publication 541, Partnerships. Exception—Community income. If you and your spouse wholly own an unincorporated business as com- munity property under the community property laws of a state, foreign country, or U.S. possession, you can treat the business either as a sole proprietorship or a partner- ship. The only states with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mex- ico, Texas, Washington, and Wisconsin. A change in your reporting position will be treated as a conversion of the entity. Exception—Qualified joint venture. If you and your spouse each materially participate as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership for the tax year. Making this election will allow you to avoid the complexity of Form 1065 but still give each spouse credit for social security earnings on which retirement benefits are based. For an explanation of "material partici- pation," see the Instructions for Schedule C, line G. To make this election, you must divide all items of in- come, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. Each of you must file a separate Schedule C or C-EZ and a separate Schedule SE. For more information, see Qualified Joint Venture in the Instructions for Schedule SE. This publication does not cover the topics listed in the following table. IF you need information about: THEN you should see: Corporations Publication 542 Farming Publication 225 Fishermen (Capital Construction Fund) Publication 595 Partnerships Publication 541 Passive activities Publication 925 Recordkeeping Publication 583 Rental Publication 527 S corporations Instructions for Form 1120S What you need to know. Table A provides a list of questions you need to answer to help you meet your fed- eral tax obligations. After each question is the location in this publication where you will find the related discussion. What You Need To Know About Federal Taxes (Note. The following is a list of questions you may need to answer so you can fill out your federal income tax return. Chapters are given to help you find the related discussion in this publication.) What must I know Where to find the answer What kinds of federal taxes do I have to pay? How do I pay them? See chapter 1. What forms must I file? See chapter 1. What must I do if I have employees? See Employment Taxes in chapter 1. Do I have to start my tax year in January, or can I start it in any other month? See Accounting Periods in chapter 2. What method can I use to account for my income and expenses? See Accounting Methods in chapter 2. What kinds of business income do I have to report on my tax return? See chapter 5. What kinds of business expenses can I deduct on my tax return? See Business Expenses in chapter 8. What kinds of expenses are not deductible as business expenses? See Expenses You Cannot Deduct in chapter 8. What happens if I have a business loss? Can I deduct it? See chapter 9. What must I do if I disposed of business property during the year? See chapter 3. What are my rights as a taxpayer? See chapter 11. Where do I go if I need help with federal tax matters? See chapter 12. Table A. Publication 334 (2012) Page 3 Page 4 of 53 Fileid: Publications/P334/2012/C/XML/Cycle06/source 11:47 - 3-Dec-2012 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing. IRS mission. Provide America's taxpayers top quality service by helping them understand and meet their tax re- sponsibilities and by applying the tax law with integrity and fairness to all. Comments and suggestions. We welcome your com- ments about this publication and your suggestions for fu- ture editions. You can write to us at the following address: Internal Revenue Service Business Forms and Publications Branch SE:W:CAR:MP:T:B 1111 Constitution Ave. NW, IR-6526 Washington, DC 20224 We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. You can email us at taxforms@irs.gov. Please put “Publications Comment” on the subject line. You can also send us comments from www.irs.gov/formspubs, select “Comment on Tax Forms and Publications” under “More Information.” Although we cannot respond individually to each com- ment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Ordering forms and publications. Visit www.irs.gov/formspubs to download forms and publica- tions, call 1-800-829-3676, or write to the address below and receive a response within 10 days after your request is received. Internal Revenue Service 1201 N. Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. If you have a tax question, check the information available on IRS.gov or call 1-800-TAX-FORM (1-800-829-1040). We cannot answer tax questions sent to either of the above addresses. Future Developments For the latest information about developments related to Publication 334, such as legislation enacted after it was published, go to www.irs.gov/pub334. What's New for 2012 The following are some of the tax changes for 2012. For information on other changes, go to IRS.gov. Tax rates. For tax years beginning in 2012, the social security part of the self-employment tax remains at 10.4%. The Medicare part of the tax remains at 2.9%. As a result, the self-employment tax is 13.3%. Maximum net earnings. The maximum net self-employ- ment earnings subject to the social security part of the self-employment tax increases to $110,100 for 2012. There is no maximum limit on earnings subject to the Medicare part. Standard mileage rate. For 2012, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 55.5 cents per mile. For more information, see Car and Truck Expenses in chapter 8. What's New for 2013 The following are some of the tax changes for 2013. For information on other changes, go to IRS.gov. Standard mileage rate. For 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 56.5 cents per mile. Self-employment tax The maximum net self-employ- ment earnings subject to the social security part of the self-employment tax is $113,700 for 2013. Reminders Accounting methods. Certain small business taxpayers may be eligible to adopt or change to the cash method of accounting and may not be required to account for inven- tories. For more information, see Inventories in chapter 2. Reportable transactions. You must file Form 8886, Re- portable Transaction Disclosure Statement, to report cer- tain transactions. You may have to pay a penalty if you are required to file Form 8886 but do not do so. You may also have to pay interest and penalties on any reportable trans- action understatements. Reportable transactions include: 1. Transactions the same as or substantially similar to tax avoidance transactions identified by the IRS, 2. Transactions offered to you under conditions of confi- dentiality for which you paid an advisor a minimum fee, 3. Transactions for which you have, or a related party has, contractual protection against disallowance of the tax benefits, 4. Transactions that result in losses of at least $2 million in any single tax year ($50,000 if from certain foreign currency transactions) or $4 million in any combina- tion of tax years, and 5. Transactions the same or substantially similar to one of the types of transactions the IRS has identified as a transaction of interest. For more information, see the Instructions for Form 8886. Photographs of Missing Children The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Page 4 Publication 334 (2012) Page 5 of 53 Fileid: Publications/P334/2012/C/XML/Cycle06/source 11:47 - 3-Dec-2012 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. 1. Filing and Paying Business Taxes Introduction This chapter explains the business taxes you may have to pay and the forms you may have to file. It also discusses taxpayer identification numbers. Table 1-1 lists the benefits of filing electronically. Table 1-2 lists the federal taxes you may have to pay, their due dates, and the forms you use to report them. Table 1-3 provides checklists that highlight the typical forms and schedules you may need to file if you ever go out of business. You may want to get Publication 509, Tax Calen- dars. It has tax calendars that tell you when to file returns and make tax payments. Useful Items You may want to see: Publication Tax Withholding and Estimated Tax Form (and Instructions) U.S. Individual Income Tax Return Estimated Tax for Individuals Profit or Loss From Business Net Profit From Business Self-Employment Tax See chapter 12 for information about getting publications and forms. Identification Numbers This section explains three types of taxpayer identification numbers, who needs them, when to use them, and how to get them. Social security number (SSN). Generally, use your SSN as your taxpayer identification number. You must put TIP 505 1040 1040-ES Sch C (Form 1040) Sch C-EZ (Form 1040) Sch SE (Form 1040) this number on each of your individual income tax forms, such as Form 1040 and its schedules. To apply for an SSN, use Form SS-5, Application for a Social Security Card. This form is available at Social Se- curity Administration (SSA) offices or by calling 1-800-772-1213. It is also available from the SSA website at www.socialsecurity.gov. Individual taxpayer identification number (ITIN). The IRS will issue an ITIN if you are a nonresident or resident alien and you do not have and are not eligible to get an SSN. In general, if you need to obtain an ITIN, you must attach Form W-7, Application for IRS Individual Taxpayer Identification Number, with your signed, original, comple- ted tax return and any other required documentation and mail them to the following address. Internal Revenue Service ITIN Operation P.O. Box 149342 Austin, TX 78714-9342 The exceptions are covered in detail in the instructions for Form W-7. If you must include another person's SSN on your return and that person does not have and cannot get an SSN, enter that person's ITIN. The application is also available in Spanish. The form is available at IRS.gov or you can call 1-800-829-3676 to order the form. An ITIN is for tax use only. It does not entitle the holder to social security benefits or change the holder's employment or immigration status. Employer identification number (EIN). You must also have an EIN to use as a taxpayer identification number if you do either of the following. Pay wages to one or more employees. File pension or excise tax returns. If you must have an EIN, include it along with your SSN on your Schedule C or C-EZ. You can apply for an EIN: Online by clicking on the EIN link at www.irs.gov/businesses/small. The EIN is issued im- mediately once the application information is valida- ted. By telephone at 1-800-829-4933 from 7:00 a.m. to 7:00 p.m. in your local time zone. By mailing or faxing Form SS-4, Application for Em- ployer Identification Number. New EIN. You may need to get a new EIN if either the form or the ownership of your business changes. For more information, see Publication 1635, Understanding Your EIN. When you need identification numbers of other per- sons. In operating your business, you will probably make certain payments you must report on information returns. These payments are discussed under Information Returns, later in this chapter. You must give the recipient CAUTION ! Chapter 1 Filing and Paying Business Taxes Page 5 Page 6 of 53 Fileid: Publications/P334/2012/C/XML/Cycle06/source 11:47 - 3-Dec-2012 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing. of these payments (the payee) a statement showing the total amount paid during the year. You must include the payee's identification number and your identification num- ber on the returns and statements. Employee. If you have employees, you must get an SSN from each of them. Record the name and SSN of each employee exactly as they are shown on the employ- ee's social security card. If the employee's name is not correct as shown on the card, the employee should re- quest a new card from the SSA. This may occur if the em- ployee's name was changed due to marriage or divorce. Form W-4, Employee's Withholding Allowance Certifi- cate, is completed by each employee so the correct fed- eral income tax can be withheld from their pay. If your employee does not have an SSN, he or she should file Form SS-5 with the SSA. Other payee. If you make payments to someone who is not your employee and you must report the payments on an information return, get that person's SSN. If you must report payments to an organization, such as a corpo- ration or partnership, you must get its EIN. To get the payee's SSN or EIN, use Form W-9, Re- quest for Taxpayer Identification Number and Certifica- tion. A payee who does not provide you with an identifica- tion number may be subject to backup withholding. For in- formation on backup withholding, see the Form W-9 in- structions and the General Instructions for Certain Information Returns. Income Tax This part explains whether you have to file an income tax return and when you file it. It also explains how you pay the tax. Do I Have To File an Income Tax Return? You have to file an income tax return for 2012 if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 instruc- tions. How Do I File? File your income tax return on Form 1040 and attach Schedule Cor Schedule C-EZ. Enter the net profit or loss from Schedule C or Schedule C-EZ on page 1 of Form 1040. Use Schedule C to figure your net profit or loss from your business. If you operated more than one business as a sole proprietorship, you must attach a separate Sched- ule C for each business. You can use the simpler Sched- ule C-EZ if you operated only one business as a sole pro- prietorship, you did not have a net loss, and you meet the other requirements listed in Part I of the schedule. IRS e-file (Electronic Filing) You may be able to file your tax returns electronically using an IRS e-file option. Table 1-1 lists the benefits of IRS e-file. IRS e-file uses automation to replace most of the manual steps needed to process paper returns. As a result, the processing of e-file returns is faster and more accurate than the processing of paper returns. As with a paper return, you are responsible for making sure your re- turn contains accurate information and is filed on time. Using e-file does not affect your chances of an IRS ex- amination of your return. You can file most commonly used business forms using IRS e-file. For more information, visit IRS.gov. Electronic signatures. Paperless filing is easier than you think and it's available to most taxpayers who file electronically—including those first-time filers who were 16 or older at the end of 2012. If you file electronically us- ing tax preparation software or a tax professional, you will participate in the Self-Select PIN (personal identification number) program. If you are married filing jointly, you and your spouse will each need to create a PIN and enter these PINs as your electronic signatures. To create a PIN, you must know your adjusted gross in- come (AGI) from your originally filed 2011 income tax re- turn (not from an amended return, Form 1040X, or any math error notice from the IRS). You will also need to pro- vide your date of birth (DOB). Make sure your DOB is ac- curate and matches the information on record with the So- cial Security Administration before you e-file. To do this, check your annual Social Security Statement. With a Self-Select PIN, there is nothing to sign and nothing to mail—not even your Forms W-2. For more de- tails on the Self-Select PIN program, visit IRS.gov. State returns. In most states, you can file an electronic state return simultaneously with your federal return. For more information, check with your local IRS office, state tax agency, tax professional, or IRS.gov. Refunds. You can have your refund check mailed to you, or you can have your refund deposited directly to your checking or savings account. With e-file, your refund will be issued in half the time as when filing on paper. Most refunds are issued within 3 weeks. If you choose Direct Deposit, you can receive your refund in as few as 10 days. Offset against debts. As with a paper return, you may not get all of your refund if you owe certain past-due amounts, such as federal tax, state tax, a student loan, or child support. You will be notified if the refund you claimed has been offset against your debts. Refund inquiries. You can check the status of your re- fund if it has been at least 3 weeks from the date you filed your return. Be sure to have a copy of your tax return Page 6 Chapter 1 Filing and Paying Business Taxes Page 7 of 53 Fileid: Publications/P334/2012/C/XML/Cycle06/source 11:47 - 3-Dec-2012 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing. available because you will need to know the filing status, the first social security number shown on the return, and the exact whole-dollar amount of the refund. To check on your refund, do one of the following. Go to IRS.gov and click on Where's My Refund. Call 1-800-829-4477 for automated refund informa- tion, and follow the recorded instructions. Call 1-800-829-1954 during the hours shown in your form instructions. Balance due. If you owe tax, you must pay it by April 15, 2013, to avoid late-payment penalties and interest. You can make your payment electronically by scheduling an electronic funds withdrawal from your checking or savings account or by credit card. Using an Authorized IRS e-file Provider Many tax professionals can electronically file paperless returns for their clients. You have two options. 1. You can prepare your return, take it to an authorized IRS e-file provider, and have the provider transmit it electronically to the IRS. 2. You can have an authorized IRS e-file provider pre- pare your return and transmit it for you electronically. You will be asked to complete Form 8879, IRS e-file Signature Authorization, to authorize the provider to enter your self-selected PIN on your return. Depending on the provider and the specific services re- quested, a fee may be charged. To find an authorized IRS e-file provider near you, go to IRS.gov or look for an “Au- thorized IRS e-file Provider” sign. Using Your Personal Computer A computer with Internet access is all you need to file your tax return using IRS e-file. When you use your personal computer, you can e-file your return from your home any time of the day or night. Sign your return electronically us- ing a self-selected PIN to complete the process. There is no signature form to submit or Forms W-2 to send in. Free Internet filing options. More taxpayers can now prepare and e-file their individual income tax returns free using commercial tax preparation software accessible through IRS.gov or www.usa.gov. The IRS is partnering with the tax software industry to offer free preparation and filing services to a significant number of taxpayers. Secur- ity and privacy certificate programs will assure tax data is safe and secure. To see if you qualify for these services, visit the Free Internet Filing Homepage at IRS.gov. If you cannot use the free services, you can buy tax preparation software at various electronics stores or com- puter and office supply stores. You can also download software from the Internet or prepare and file your return completely online by using tax preparation software avail- able on the Internet. Filing Through Employers and Financial Institutions Some businesses offer free e-file to their employees, members, or customers. Others offer it for a fee. Ask your employer or financial institution if they offer IRS e-file as an employee, member, or customer benefit. Free Help With Your Return Free help in preparing your return is available nationwide from IRS-trained volunteers. The Volunteer Income Tax Assistance (VITA) program is designed to help low-in- come taxpayers, and the Tax Counseling for the Elderly (TCE) program is designed to assist taxpayers age 60 or older with their tax returns. Some locations offer free elec- tronic filing. When Is My Tax Return Due? Form 1040 for calendar year 2012 is due by April 15, 2013. If you use a fiscal year (explained in chapter 2), your return is due by the 15th day of the 4th month after the end of your fiscal year. If you file late, you may have to pay penalties and interest. If you cannot file your return on time, use Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, to request an automatic 6-month extension. For calendar year taxpayers, this will extend the tax filing due date until October 15. Filing an Table 1-1. Benefits of IRS e-file Accuracy • Your chance of getting an error notice from the IRS is significantly reduced. Security • Your privacy and security are assured. Electronic signatures • Create your own personal identification number (PIN) and file a completely paperless return through your tax preparation software or tax professional. There is nothing to mail. Proof of acceptance • You receive an electronic acknowledgment within 48 hours that the IRS has accepted your return for processing. Fast refunds • You get your refund faster with Direct Deposit—in as few as 10 days. Free Internet filing options • Use IRS.gov to access commercial tax preparation and e-file services available at no cost to eligible taxpayers. Electronic payment options • Convenient, safe, and secure electronic payment options are available. E-file and pay your taxes in a single step. Schedule an electronic funds withdrawal from your checking or savings account (up to and including April 15, 2013) or pay by credit card. Federal/State filing • Prepare and file your federal and state tax returns together and double the benefits you get from e-file. Chapter 1 Filing and Paying Business Taxes Page 7 Page 8 of 53 Fileid: Publications/P334/2012/C/XML/Cycle06/source 11:47 - 3-Dec-2012 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing. extension does not extend the time to pay your taxes, only the time to file the tax return. How Do I Pay Income Tax? Federal income tax is a pay-as-you-go tax. You must pay it as you earn or receive income during the year. An em- ployee usually has income tax withheld from his or her pay. If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay esti- mated tax. You generally have to make estimated tax pay- ments if you expect to owe taxes, including self-employ- ment tax (discussed later), of $1,000 or more when you file your return. Use Form 1040-ES to figure and pay the tax. If you do not have to make estimated tax payments, you can pay any tax due when you file your return. For more information on estimated tax, see Publication 505, Tax Withholding and Estimated Tax. What are my payment options? You can pay your esti- mated tax electronically using various options. If you pay electronically, there is no need to mail in Form 1040-ES payment vouchers. These options include: 1. Paying electronically through the Electronic Federal Tax Payment System (EFTPS). 2. Paying by authorizing an electronic funds withdrawal when you file Form 1040 electronically. 3. Paying by credit or debit card over the phone or by In- ternet. Other options include crediting an overpayment from your 2012 return to your 2013 estimated tax, or mailing a check or money order with a Form 1040-ES payment voucher. EFTPS 1. To enroll in EFTPS, go to www.eftps.gov or call 1-800-555-4477. 2. When you request a new EIN and you will have a tax obligation, you are automatically enrolled in EFTPS. 3. Benefits of EFTPS: a. The chance of an error in making your payments is reduced. b. You receive immediate confirmation of every transaction. Penalty for underpayment of tax. If you did not pay enough income tax and self-employment tax for 2012 by withholding or by making estimated tax payments, you may have to pay a penalty on the amount not paid. The IRS will figure the penalty for you and send you a bill. Or you can use Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, to see if you have to pay a penalty and to figure the penalty amount. For more information, see Publication 505. Self-Employment (SE) Tax Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for them- selves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. If you earned income as a statutory employee, you do not pay SE tax on that income. Social security coverage. Social security benefits are available to self-employed persons just as they are to wage earners. Your payments of SE tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medi- care) benefits. By not reporting all of your self-employment in- come, you could cause your social security bene- fits to be lower when you retire. How to become insured under social security. You must be insured under the social security system before you begin receiving social security benefits. You are in- sured if you have the required number of credits (also called quarters of coverage), discussed next. Earning credits in 2012 and 2013. For 2012, you re- ceived one credit, up to a maximum of four credits, for each $1,130 ($1,160 for 2013) of income subject to social security taxes. Therefore, for 2012, if you had income (self-employment and wages) of $4,520 that was subject to social security taxes, you receive four credits ($4,520 ÷ $1,130). For an explanation of the number of credits you must have to be insured and the benefits available to you and your family under the social security program, consult your nearest Social Security Administration (SSA) office. Making false statements to get or to increase so- cial security benefits may subject you to penal- ties. The Social Security Administration (SSA) time limit for posting self-employment income. Generally, the SSA will give you credit only for self-employment income reported on a tax return filed within 3 years, 3 months, and 15 days after the tax year you earned the income. If you file your tax return or report a change in your self-employ- ment income after this time limit, the SSA may change its records, but only to remove or reduce the amount. The SSA will not change its records to increase your self-em- ployment income. Who must pay self-employment tax. You must pay SE tax and file Schedule SE (Form 1040) if either of the fol- lowing applies. 1. Your net earnings from self-employment (excluding church employee income) were $400 or more. CAUTION ! CAUTION ! CAUTION ! Page 8 Chapter 1 Filing and Paying Business Taxes Page 9 of 53 Fileid: Publications/P334/2012/C/XML/Cycle06/source 11:47 - 3-Dec-2012 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing. 2. You had church employee income of $108.28 or more. The SE tax rules apply no matter how old you are and even if you are already receiving social se- curity or Medicare benefits. SE tax rate. For 2012, the SE tax rate on net earnings is 13.3% (10.4% social security tax plus 2.9% Medicare tax). Maximum earnings subject to SE tax. Only the first $110,100 of your combined wages, tips, and net earnings in 2012 is subject to any combination of the 10.4% social security part of SE tax, social security tax, or railroad re- tirement (tier 1) tax. All your combined wages, tips, and net earnings in 2012 are subject to any combination of the 2.9% Medicare part of SE tax, social security tax, or railroad retirement (tier 1) tax. If wages and tips you receive as an employee are sub- ject to either social security or railroad retirement (tier 1) tax, or both, and total at least $110,100, do not pay the 10.4% social security part of the SE tax on any of your net earnings. However, you must pay the 2.9% Medicare part of the SE tax on all your net earnings. CAUTION ! Deduct the employer-equivalent portion of your SE tax as an adjustment to income on line 27 of Form 1040. More information. For information on methods of calcu- lating SE tax, see Chapter 10, Self-Employment Tax. Employment Taxes If you have employees, you will need to file forms to report employment taxes. Employment taxes include the follow- ing items. Social security and Medicare taxes. Federal income tax withholding. Federal unemployment (FUTA) tax. For more information, see Publication 15 (Circular E), Em- ployer's Tax Guide. That publication explains your tax re- sponsibilities as an employer. To help you determine whether the people working for you are your employees, see Publication 15-A, Employ- er's Supplemental Tax Guide. That publication has infor- mation to help you determine whether an individual is an independent contractor or an employee. TIP Table 1-2. Which Forms Must I File? IF you are liable for: THEN use Form: DUE by: 1 Income tax 1040 and Schedule C or C-EZ 2 15th day of 4th month after end of tax year. Self-employment tax Schedule SE File with Form 1040. Estimated tax 1040-ES 15th day of 4th, 6th, and 9th months of tax year, and 15th day of 1st month after the end of tax year. Social security and Medicare taxes and income tax withholding 941 or 944 April 30, July 31, October 31, and January 31 3 . See Publication 15. Providing information on social security and Medicare taxes and income tax withholding W-2 (to employee) W-2 and W-3 (to the Social Security Administration) January 31 3 . Last day of February (March 31 if filing electronically) 3 . Federal unemployment (FUTA) tax 940 January 31 3 . April 30, July 31, October 31, and January 31, but only if the liability for unpaid tax is more than $500. Filing information returns for payments to nonemployees and transactions with other persons See Information Returns Forms 1099 – to the recipient by January 31 and to the IRS by February 28 (March 31 if filing electronically). Other forms – see the General Instructions for Certain Information Returns. Excise tax See Excise Taxes See the instructions to the forms. 1 If a due date falls on a Saturday, Sunday, or legal holiday, file by the next day that is not a Saturday, Sunday, or legal holiday. For more information, see Publication 509, Tax Calendars. 2 File a separate schedule for each business. 3 See the form instructions if you go out of business, change the form of your business, or stop paying wages. Chapter 1 Filing and Paying Business Taxes Page 9 Page 10 of 53 Fileid: Publications/P334/2012/C/XML/Cycle06/source 11:47 - 3-Dec-2012 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing. If you incorrectly classify an employee as an in- dependent contractor, you may be held liable for employment taxes for that worker plus a penalty. An independent contractor is someone who is self-em- ployed. You do not generally have to withhold or pay any taxes on payments made to an independent contractor. Excise Taxes This section identifies some of the excise taxes you may have to pay and the forms you have to file if you do any of the following. Manufacture or sell certain products. Operate certain kinds of businesses. Use various kinds of equipment, facilities, or products. Receive payment for certain services. For more information on excise taxes, see Publication 510, Excise Taxes. Form 720. The federal excise taxes reported on Form 720, Quarterly Federal Excise Tax Return, consist of sev- eral broad categories of taxes, including the following. Environmental taxes on the sale or use of ozone-de- pleting chemicals and imported products containing or manufactured with these chemicals. Communications and air transportation taxes. Fuel taxes. Tax on the first retail sale of heavy trucks, trailers, and tractors. Manufacturers taxes on the sale or use of a variety of different articles. Tax on indoor tanning services. Form 2290. There is a federal excise tax on the use of certain trucks, truck tractors, and buses on public high- ways. The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. Report the tax on Form 2290, Heavy Highway Vehicle Use Tax Return. For more information, see the Instructions for Form 2290. Depositing excise taxes. If you have to file a quarterly excise tax return on Form 720, you may have to deposit your excise taxes before the return is due. For details on depositing excise taxes, see the Instructions for Form 720. Information Returns If you make or receive payments in your business, you may have to report them to the IRS on information returns. The IRS compares the payments shown on the informa- tion returns with each person's income tax return to see if the payments were included in income. You must give a copy of each information return you are required to file to CAUTION ! the recipient or payer. In addition to the forms described below, you may have to use other returns to report certain kinds of payments or transactions. For more details on in- formation returns and when you have to file them, see the General Instructions for Certain Information Returns. Form 1099-MISC. Use Form 1099-MISC, Miscellaneous Income, to report certain payments you make in your busi- ness. These payments include the following items. Payments of $600 or more for services performed for your business by people not treated as your employ- ees, such as fees to subcontractors, attorneys, ac- countants, or directors. Rent payments of $600 or more, other than rents paid to real estate agents. Prizes and awards of $600 or more that are not for services, such as winnings on TV or radio shows. Royalty payments of $10 or more. Payments to certain crew members by operators of fishing boats. You also use Form 1099-MISC to report your sales of $5,000 or more of consumer goods to a person for resale anywhere other than in a permanent retail establishment. Form W-2. You must file Form W-2, Wage and Tax Statement, to report payments to your employees, such as wages, tips, and other compensation, withheld income, social security, and Medicare taxes. You can file Form W-2 online. For more information about Form W-2, see the Instructions for Forms W-2 and W-3. Penalties. The law provides for the following penalties if you do not file Form 1099-MISC or Form W-2 or do not correctly report the information. For more information, see the General Instructions for Certain Information Returns. Failure to file information returns. This penalty applies if you do not file information returns by the due date, do not include all required information, or report incor- rect information. Failure to furnish correct payee statements. This pen- alty applies if you do not furnish a required statement to a payee by the required date, do not include all re- quired information, or report incorrect information. Waiver of penalties. These penalties will not apply if you can show that the failure was due to reasonable cause and not willful neglect. In addition, there is no penalty for failure to include all required information, or for including incorrect information, on a de minimis (small) number of information returns if you correct the errors by August 1 of the year the returns are due. (A de minimis number of returns is the greater of 10 or 1 2 of 1% of the total number of returns you are re- quired to file for the year.) Form 8300. You must file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, if you receive more than $10,000 in cash in one transac- tion, or two or more related business transactions. Cash Page 10 Chapter 1 Filing and Paying Business Taxes [...]... efficient appliance credit (Form 8909) For more information, see Form 8909 Energy efficient home credit (Form 8908) For more information, see Form 8908 Indian employment credit (Form 8845) For more information, see Form 8845 How To Claim the Credit Investment credit (Form 3468) For more information, see Form 3468 To claim a general business credit, you will first have to get the forms you need to claim... Credit for employer differential wage payments (Form 8932) For more information, see Form 8932 Credit for employer-provided childcare facilities and services (Form 8882) This credit applies to the qualified expenses you paid for employee childcare and qualified expenses you paid for childcare resource and referral services For more information, see Form 8882 Credit for increasing research activities (Form... have occurred that fix the fact of liability, and b The liability can be determined with reasonable accuracy 2 Economic performance has occurred Economic performance You generally cannot deduct or capitalize a business expense until economic performance occurs If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services... 1986 For more information, see Form 8586 5 Mine rescue team training credit (Form 8923) For more information, see Form 8923 Business Income New markets credit (Form 8874) This credit is for qualified equity investments made in qualified community development entities For more information, see Form 8874 Introduction Nonconventional source fuel credit (Form 8907) This credit is for qualified coke and coke... fuels credit (Form 8864) For more information, see Form 8864 Page 18 Chapter 4 General Business Credits Carbon dioxide sequestration credit (Form 8933) This credit is for carbon dioxide which is captured at a qualified facility and disposed of in a secure geological storage or used in a qualified enhanced oil or natural gas recovery project For more information, see Form 8933 Credit for employer social... information, see Form 8931 Alcohol and cellulosic biofuel fuels credit (Form 6478) For more information, see Form 6478 Alternative fuel vehicle refueling property credit (Form 8911) This credit applies to the cost of any qualified fuel vehicle refueling property you placed in service For more information, see Form 8911 Alternative motor vehicle credit (Form 8910) For more information, see Form 8910 Biodiesel... or as the property is used If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services An exception allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred For more information on economic performance, see Economic Performance under Accrual Method in Publication... vehicles placed in service during the tax year For more information, including information on what is considered as a qualified plug-in electric drive motor vehicle, see Form 8936 Qualified plug-in electric vehicle credit (Form 8834, Part I only) This portion of the credit is for certain qualified plug-in electric vehicles See Form 8834 for more information, including information on what is considered... electric vehicle Qualified railroad track maintenance credit (Form 8900) For more information, see Form 8900 Renewable electricity, refined coal, and Indian coal production credit (Form 8835) This credit is for the sale of electricity, refined coal, or Indian coal produced in the United States or U.S possessions from qualified energy resources at a qualified facility For more information, see Form... reported on Schedule C or C- EZ However, see Securities dealer, earlier, for an exception that applies to section 1256 contracts For more information about securities traders, see Publication 550, Investment Income and Expenses Accounting for Your Income Accounting for your income for income tax purposes differs at times from accounting for financial purposes This section discusses some of the more common . resource and referral services. For more information, see Form 8882. Credit for increasing research activities (Form 6765). For more information, see Form. Service Get forms and other information faster and easier by: Internet IRS.gov Tax Guide for Small Business (For Individuals Who Use Schedule C or C- EZ) Publication